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This video provides an example of how to calculate a company’s operating profit or loss when Absorption Costing is used in Managerial Accounting.

To calculate operating profit or less with Absorption Costing, you subtract operating expenses from operating revenues. Fixed manufacturing overhead is treated as a product cost, which means that changes in inventory could affect the company’s operating profit or loss. For example, if the company produces more units than it sells in a period, some of the fixed manufacturing overhead will be deferred to a future period instead of being expensed in the current period. This is a key distinction from Variable Costing; under Variable Costing, all fixed manufacturing overhead costs are treated as period costs and are expensed immediately.